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Money Doesn't Grow on Trees; So Why Give It Away?

Understanding the 1031 Tax Deferred Exchange.

There is a special tax deferrement IRS code 1031 which enables investors who qualify to exchange their property with “like kind” property and defer those pesky capital gains taxes. Keep in mind it is not a forgiveness of taxes, Uncle Sam won’t let that slide, but more of a trade up and you can pay us later program.

This 1031 exchange is for investment properties and investment assets as well.

Some assets that qualify:

  1. Investment property
  2. Aircraft
  3. Construction Equipment
  4. Contracts
  5. Fleet Vehicles
  6. Vessels

If you have any of the above and are thinking of seeing, if you qualify, think before you leap. There are qualifying rules and you must have a licensed 1031 exchange company handle the transaction for you. All proceeds of the first sale are held in an account established by the 1031 company. You can never touch the money until it is reinvested. Upon closing the exchange company will release the funds to the closing Attorney who will appropriate the funds towards the closing. In truth it is fairly easy to qualify for and fairly easy to arrange. 

Here is an example…

I had a client, who owned a home in Watertown. He was getting $1,600 monthly rent for several years. He paid $100,000 for the home. We sold his home for $350,000 which was a gain of $250,000.

If he had not reinvested under the 1031 exchange his approximate tax would have been upwards of $50,000. He reinvested in a 3 family home in Framingham for equal or greater value, deferred the tax and was getting $3,500+ in monthly rental income.

 If you think you qualify talk to your tax specialist and ask them for a 1031 referral agency. It could save you; I mean defer you, a lot.

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